Deploying Portfolio Cash in Short-Duration Models

October 11, 2017

By Tim McPartland

We previously had written about deploying some portfolio cash in our short/medium duration models and in the last 10 days we have fully invested both portfolios.

Our favorite portfolio is the Medium Duration Income with Zip Portfolio. Recall that it was constructed on August 13, 2015 as a low-stress portfolio for investors and generate returns that were substantially above the 10-year Treasury. We have been more than happy with this portfolio as it has returned just short of 19% in 26 months.

The portfolio holds mainly short- and medium-duration baby bonds and term preferreds with a couple of real estate investment trusts (REITs) tossed in to provide a possibility for higher returns. Obviously, with a couple of REITs tossed into the mix there is always a possibility that returns will lag, but thus far this has not been the case.

In this portfolio, we have purchased the new Gladstone Capital 6% Term Preferred issue (NASDAQ: GLADN). Needless to say, the 6% coupon on this new term preferred falls short of the 7% provided by the Harvest Capital 7% Notes (NASDAQ: HCAPL), which were just called for redemption. But this is nothing new as we have been dealing with this slow erosion of coupon for a number of years and it has become increasingly painful.

With the addition of the new Gladstone issue, this portfolio is 98% invested and has a current yield of 6.59%. The two REITs currently held are New Residential Investment (NYSE: NRZ) and Independence Realty Trust (NYSE: IRT), both of which have capital gains of 21% and 12%, respectively. It is my intent to sell these issues this week and await a setback in prices for new purchases, as this small portion of the portfolio is meant to add “zip” and to be sold when the mission is accomplished. This sale will generate about $9,000 in proceeds, meaning we will go from 98% invested to about 89-90%. We can live with this for about a month and then will need to get the money deployed.

The Short/Medium Duration Portfolio, which was originated on October 13, 2014, is very, very similar to the above portfolio, but has no REITs or other income issues to provide added “zip.” We now are four days short of the third anniversary of portfolio inception and there is a gain of 20.29%. This means we are going to be just short of our 7% annual target, but this is unavoidable with the current low interest rate environment.

We recently purchased two issues in this portfolio, one of which is the same Gladstone Capital 6% Term Preferred noted above. Additionally, we purchased the Horizon Technology Finance 6.25% baby bonds (NASDAQ: HTFA). With the addition of these two issues, we are now 90% invested in this portfolio and will be looking for one additional opportunity.

The current yield in this portfolio has tumbled to 5.62%. Without the addition of risk, we will not be able to maintain the 7% annual gain.

Readers should remember that both of these portfolios were constructed in a way which is meant to minimize trading and eliminate as much volatility as possible by owning shorter duration issues. We personally do not like to “trade,” we just want a reasonable return and these portfolios seen to do the trick.


Tim McPartland

Tim McPartland is a private investor with over 45 years of investment experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.

 

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